Thursday, 4 August 2016

Euro-Area Output Unexpectedly Picks Up as Brexit Qualms Fade

Euro-area output unexpectedly accelerated to the highest in six months, signaling that manufacturers and services providers are shrugging off concerns that the U.K.’s vote to leave the European Union will harm business.

A Purchasing Managers’ Index for both industries rose to 53.2 in July from 53.1 in June, Markit Economics said Wednesday. A July 22 estimate was for a drop to 52.9. A reading above 50 indicates expansion.

The increase “presents a slightly better picture” and “is especially encouraging as it suggests the region saw little overall contagion from the U.K.’s Brexit vote,” said Chris Williamson, chief economist at Markit in London. An “improved hiring trend suggests firms have gained sufficient confidence in the durability and sustainability of the upturn to expand capacity in increasing numbers.”

A pickup in private-sector activity is the latest sign of the region’s resilience to the outcome of Britain’s June 23 referendum rejecting EU membership. Most euro-area confidence indicators have barely budged in the past four weeks, while data suggest the U.K. economy is already deteriorating.

U.K. construction shrank the most since the financial crisis in July, and manufacturing slumped more than initially estimated. Bank of England policy makers are meeting this week to discuss the outlook and consider the stimulus they may need to prop up the economy. They will announce their decision on Thursday.

In the 19-nation euro region, faster output growth in July was driven by Germany, where the PMI signals a quarterly rate of expansion of 0.5 percent. Growth in Italy and Spain slowed, while the French economy continued to stagnate, Markit said. For the euro area, the company projects a “modest” increase in gross domestic product of 0.3 percent.

“Such a meager pace of expansion will inevitably fuel speculation about what the ECB could and should do to boost growth, and when,” Williamson said.

While European Central Bank President Mario Draghi has said that he remains ready to act, policy makers currently see no urgent need to adjust or expand their bond-buying program. Visibility as to the impact of Brexit on the economy is low, and officials didn’t discuss specific stimulus measures, he said at the press conference following the Governing Council’s July meeting.